“The Fed’s practice of paying banks to keep money parked at the Fed in deposit accounts instead of going into the economy is unhealthy and distorting; the rate should come down quickly as the practice is phased out.”
-Judy Shelton, June 28, 2019 

The People’s War against bond kings, queens, and court jesters alike rages on this morning with the 10yr Treasury Yield collapsing to the lowest level since just before the US general elections in November 2016. 

Let’s play a quick round of Riddle Me This – Economist Edition

Q) What happens when you combine concomitant slowdowns in growth, inflation, and profits with the nomination of two known doves to the FOMC? 

A) Lower yields, across the curve, with new cycle-lows being established for both the 10yr (1.96% this AM) and 30yr (2.49%). 

P.S. That was not a trick question. 

Both Shelton and President Trump’s other nominee Christopher Waller – DoR at the St. Louis Fed – are Ph.D.’s that support lower rates: 

“We didn’t see any overheating in the economy coming, and so the question was, why are we raising rates? We didn’t see any reason to raise rates just for the sake of raising rates… We don’t buy into the Phillips curve story that low unemployment causes inflation. Look at Japan.”
-Waller, June 28, 2019 

Importantly for investors, both candidates stand a much better chance of being confirmed by the Senate than Trump’s previous nominees Stephen Moore, Herman Cain, Nellie Liang, and Marvin Goodfriend. Waller is already a high-ranking Fed staffer and Shelton has previously been confirmed for her role as US Executive Director of the European Bank for Reconstruction and Development – a role she was appointed to by the president after advising him on the campaign trail. 

Back to the Global Macro Grind… 

The irony of Trump pushing hard for lower rates across all his channels of influence is that he replaced one of the most dovish central bankers in history with “his guy” Jerome “PE” Powell. 

Whether or not he is successful in his drive to turn the Fed into a hybrid version of the Bank of Japan is largely irrelevant at this point of The Cycle. Longer-term interest rates would be headed lower regardless. 

Yesterday was the first of what we think will be many #Quad4 days in the third quarter of 2019. Yes, the market (S&P 500) was up small on thin volume, but the dispersion in performance at the sector and style factor level was telling. 

Relative Winners: 

  1. REITS (VNQ): +1.7%
  2. Utilities (XLU): +1.4%
  3. Low-Beta/Min. Vol. (SPLV): +1.0% 

Relative Losers: 

  1. Energy (XLE): -1.6%
  2. High Beta (SPHB): -0.5%
  3. Financials (XLF): -0.3% 

How about the dispersion in performance between stocks in industries that hope The Cycle has “bottomed” vs. those that hope it continues to do what it always does – i.e. cycle? 

Relative Winners: 

  1. Gold Miners (GDX): +3.9%
  2. Homebuilders (ITB): +0.5% 

Relative Losers: 

  1. Transports (IYT): -0.9%
  2. Semiconductors (SMH): -1.2% 

Allegedly The Cycle mattered yesterday in F.I.C.C. markets too: 

Relative Winners: 

  1. Gold: +2.5%
  2. Bloomberg Barclays 25+ Year Treasurys Total Return Index: +1.0%
  3. Bloomberg Barclays US Taxable Muni Bonds Total Return Index: +0.4% 

Relative Losers: 

  1. Bloomberg Barclays US Corporate High Yield Total Return Index: -0.01%
  2. S&P/LSTA Leveraged Loan Total Return Index: 0.0%
  3. CRB Raw Industrials Index: -0.6%
  4. Copper: -0.9%
  5. WTI Crude Oil: -4.8% 

The Cycle mattered yesterday, but what about over a more relevant/investable time horizon? Would it be fair to quote returns of the aforementioned exposures from the date we published our then-contrarian view that the US GDP, CPI, and Profits cycles peaked in 3Q18 and would each trend lower over at least the NTM? 

If all you did was express that cycle view across macro markets and ignored the noise throughout, you’ve absolutely crushed it (and 99.9% of your competition). 

Select US Equity Sectors and Style Factors: 

  1. Utilities (XLU): +16.2%
  2. Low Beta/Min. Vol. (SPLV): +13.4%
  3. REITS (VNQ): +11.7%
  4. Financials (XLF): 0.0%
  5. High Beta (SPHB): -4.5%
  6. Energy (XLE): -17.4% 

Select US Equity Industries: 

  1. Gold Miners (GDX): +39.3%
  2. Homebuilders (ITB): +8.5%
  3. Semiconductors (SMH): +5.8%
  4. Transports (IYT): -8.4% 

Select F.I.C.C. Exposures: 

  1. Gold: +20.1%
  2. Bloomberg Barclays 25+ Year Treasurys Total Return Index: +16.3%
  3. Bloomberg Barclays US Taxable Muni Bonds Total Return Index: +10.9%
  4. Bloomberg Barclays US Corporate High Yield Total Return Index: +5.2%
  5. S&P/LSTA Leveraged Loan Total Return Index: +2.2%
  6. CRB Raw Industrials Index: -3.1%
  7. Copper: -5.6%
  8. WTI Crude Oil: -19.2% 

*Performance since 9/27/18 

All told, we have the unenviable task of trying to nail every Quad pivot and trade in/around key macroeconomic catalysts, but perhaps we too can learn from this lesson in Full-Cycle Investing

Don’t make the task of generating alpha any harder than it already is. Obey The Cycle and ignore the noise. 

My name is Darius Dale and contrary to the unaccountable overlords on @CNBC, I do not feel “remorse” for being overweight a litany of duration plays in my P.A. 

Happy Fourth of July! 

Our immediate-term Global Macro Risk Ranges are now: 

UST 10yr Yield 1.94-2.07% (bearish)
UST 2yr Yield 1.65-1.85% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
Utilities (XLU) 58.73-61.58 (bullish)
REITS (VNQ) 85.48-91.30 (bullish)
Financials (XLF) 26.60-28.13 (bearish)
VIX 12.17-17.12 (neutral)
USD 95.05-96.85 (neutral)
Oil (WTI) 52.03-60.15 (bearish)
Gold 1 (bullish)
Copper 2.62-2.74 (bearish) 

Keep your head on a swivel, 


Darius Dale
Managing Director

Happy Quad 4th of July - Your Clients Understand Full Cycle Investing   Your Should Too